On 22 November 2018, the Court of Justice of The European Union (CJEU) issued its judgment concerning whether the differing French tax treatment of dividend income of a resident company versus a non-resident company constitutes a restriction on the free movement of capital in violation of EU law.
The case involved three Belgium-based companies, Sofina SA, Rebelco SA, and Sidro SA, which received dividends as shareholders in French companies between 2008 and 2011. Since these financial years were loss-making for the Belgian companies, they claimed a refund of the tax withheld on the dividends. The basis of the claim was essentially that dividends received by a French company would be included in taxable income and subject to the standard corporate tax rate, but if the resident company had a net loss for the year, that dividend income would effectively not be taxed. As such, by imposing withholding tax on dividends received by a non-resident loss-making company, the differing treatment constitutes a restriction on the free movement of capital.
The French tax authority dismissed the claims, however, with the tax authority position subsequently upheld by the court of first instance and on appeal. The case was ultimately heard by the Conseil d'État (Council of State), which decided to stay the proceedings and to refer the CJEU.
In its judgment, the CJEU found in favor of the Belgian companies. The CJEU found that the French legislation at issue in the main proceedings does constitute a restriction on the free movement of capital primarily because it is liable to procure an advantage for loss-making resident companies, since it gives rise, at the very least, to a cash-flow advantage, or even an exemption in the event of that company ceases trading, while non-resident companies are subject to immediate and definitive taxation irrespective of their results. The CJEU also reviewed possible justifications put forward by the French government that would be allowed under EU law but found that no justifications could be accepted.
The final ruling of the CJEU is as follows:
Articles 63 and 65 TFEU must be interpreted as precluding the legislation of a Member State, such as that at issue in the main proceedings, pursuant to which the dividends paid by a resident company are subject to a withholding tax when they are received by a non-resident company, whereas, when such dividends are received by a resident company, under the general corporation tax rules they are subject to taxation at the end of the financial year in which they were received only if the latter company was profitable in that financial year, and such taxation may, where applicable, never be levied if that company ceases trading without becoming profitable after receiving those dividends.